Investing for Organizational Sustainability

However, these blue sky laws were generally found to be ineffective. For example, the
Investment Bankers Association told its members as early as 1915 that they could
"ignore" blue sky laws by making securities offerings across state lines through the mail.
After holding hearings on abuses on interstate frauds (commonly known as the Pecora
Commission), Congress passed the Securities Act of 1933 (15 U.S.C. § 77a), which
regulates interstate sales of securities (original issues) at the federal level. The
subsequent Securities Exchange Act of 1934 (15 U.S.C. § 78d) regulates sales of
securities in the secondary market. Section 4 of the 1934 act created the U.S. Securities
and Exchange Commission to enforce the federal securities laws; both laws are
considered parts of Franklin D. Roosevelt's New Deal raft of legislation.
The Securities Act of 1933 is also known as the "Truth in Securities Act" and the
"Federal Securities Act", or just the "1933 Act". Its goal was to increase public trust in
the capital markets by requiring uniform disclosure of information about public securities
offerings. The primary drafters of 1933 Act were Huston Thompson, a former Federal
Trade Commission (FTC) chairman, and Walter Miller and Ollie Butler, two attorneys in
the Commerce Department's Foreign Service Division, with input from Supreme Court
Justice Louis Brandeis. For the first year of the law's enactment, the enforcement of the
statute rested with the Federal Trade Commission, but this power was transferred to the
SEC following its creation in 1934.
In 1934, Roosevelt named his friend Joseph P. Kennedy, a self-made multimillionaire
financier and a leader among the Irish-American community, as the insider-as-chairman
who knew Wall Street well enough to clean it up. Two of the other five commissioners
were James M. Landis (one of the architects of the 1934 Act and other New Deal
legislation) and Ferdinand Pecora (Chief Counsel to the Senate Committee on Banking
and Currency during its investigation of Wall Street banking and stock brokerage
practices). Kennedy added a number of intelligent young lawyers, including William O.
Douglas and Abe Fortas, both of whom later became Supreme Court justices.
Kennedy's team defined the mission and operating mode for the SEC, making full use of
its wide range of legal powers. The SEC had four missions. First and most important
was to restore investor confidence in the securities market, which had practically
collapsed because of doubts about its internal integrity, and fears of the external threats
supposedly posed by anti-business elements in the Roosevelt administration. Second,
in terms of integrity, the SEC had to get rid of the penny-ante swindles based on fake
information, fraudulent devices, and unsound get-rich-quick schemes. That unsavory
element had to be prosecuted and shut down. Thirdly, and much more important than
the outright frauds, the SEC had to end the million-dollar insider maneuvers by top
officials of major corporations, whereby insiders with access to much better information
about the condition of the company knew when to buy or sell their own securities. A
crackdown on insider trading was given high priority. Finally, the SEC had to set up a
complex system of registration for all securities sold in America, with a clear-cut set of
deadlines, rules and guidelines that everyone had to follow. Drafting precise rules was
the main challenge faced by the bright young lawyers. The SEC succeeded in its four
missions, as Kennedy reassured the American business community that they would no
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